Based on statistics from the General Department of Taxation, the Tax Inspectorate inspected 214 enterprises with related-party transactions, recommending the handling of over 6.748 billion VND in the first 7 months of 2019 alone.
Results of the related-party transaction audit in the first 7 months of 2019
Specifically, following the inspection, the conclusions included tax arrears, refunds, and penalties totaling nearly 838 billion VND; a reduction in losses of over 2.774 billion VND; a reduction in deductions of over 11,8 billion VND; and an increase in taxable income of nearly 3.124 billion VND. Through inspections and audits to reassess market prices for related-party transactions, the General Department of Taxation collected over 236 billion VND in tax arrears, reduced losses by over 1.088 billion VND, and increased taxable income by over 2.942 billion VND. Furthermore, in the two years of 2017-2018, the General Department of Taxation collected over 1.400 billion VND through inspections and audits to reassess the prices of related-party transactions.
The General Department of Taxation notes that since the implementation of Decree No. 20/2017/ND-CP on strengthening inspection and control of enterprises and combating budget revenue losses, the number of enterprises voluntarily declaring related-party transactions has increased over the years. Generally, enterprises have gradually changed their awareness and are voluntarily complying with the declaration requirements regarding applicable subjects and the preparation of documentation for determining transfer pricing.
Mr. Pham Ngoc Lai – Acting Director of the Inspection Department (General Department of Taxation) also emphasized the positive aspects of strengthening inspections of enterprises with related-party transactions as follows: “The tax sector's increased review and urging of enterprises to declare information on related-party transactions according to regulations has created conditions for many enterprises to prepare documents proving the determination of market prices for related-party transactions.”
Furthermore, since most businesses with related-party transactions are large-scale enterprises, the 2019 inspection will help these businesses comply with the new regulations and improve their processes for related-party transactions.
Because businesses often face four major risks when declaring related-party transactions: errors in documentation, lack of a database for comparison, risk of explaining to tax authorities, and challenges arising from the digital economy – according to experts from RSM Vietnam Audit and Consulting Company.
Here are some typical specific situations in businesses:
When preparing documentation for related-party transactions, accountants in businesses often omit tax identification numbers, select the wrong country for the related party, or incorrectly define the relationship between the parties. Meanwhile, tax authorities usually pay attention to transactions related to the tax regulations of different countries. Therefore, these errors often put businesses at high risk.
Mr. Le Khanh Lam, Deputy General Director of RSM Vietnam, also pointed out a common mistake made by many businesses: businesses that are not eligible for exemptions still declare themselves as exempt. However, businesses should be aware that the tax authorities have the right to determine the price level, profit margin, and profit allocation ratio used for tax declaration, determining taxable income, or the amount of corporate income tax payable.
Another issue of concern is the regulations on interest rate caps in Decree No. 20/2017/ND-CP. Specifically, after two years of implementing this Decree, the General Department of Taxation has received suggestions from the business community regarding difficulties related to the interest rate cap regulations. The General Department of Taxation has compiled the businesses' concerns, developed and finalized a new draft decree to be submitted to the Ministry of Finance and then to the Government this year to replace Decree 20.
